ICICI Securities: ‘Add’ on Dr Lal Pathlabs with revised TP of Rs 1,370

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Published: September 13, 2019 2:04:32 AM

Management has maintained its guidance of mid-teen revenue growth, which would be largely driven by volumes.

ICICI Securities, Dr Lal Pathlabs, premium valuation, FCF generation, medium termDr Lal, being one of the few organised players with strong brand equity, is well positioned to benefit from the market shift towards organised players.

High growth visibility justifies premium valuation: We remain positive on Dr Lal Pathlabs’ (Dr Lal) long-term outlook considering its strong brand franchise with sustainably high revenue growth (14-15%), expansion potential, strong FCF generation and higher return ratios. We believe organised players like Dr Lal would be the biggest beneficiaries of increasing penetration and rising share of the organised sector in diagnostics market. Management has maintained its guidance of mid-teen revenue growth, which would be largely driven by volumes. We expect mid to high teen volume growth and marginal decrease in realisation as share of bundled tests increase. Maintain add with a revised target price of Rs 1,370 (earlier Rs 1,180).

High visibility of mid-teen growth to sustain in medium term: Dr Lal, being one of the few organised players with strong brand equity, is well positioned to benefit from the market shift towards organised players. More than 50% of the diagnostic market is unorganised though share of the organised market is on rise. We expect Dr Lal to witness revenue CAGR of 14.5% over FY19-FY22E.

Volume growth is key: We believe sustaining the volume growth is key in this industry considering intense competition and price uncertainty due to government’s focus on reduction in healthcare costs. Company has been able to sustain the volume growth with consistent introduction of new tests adding to the menu of ~4,900 tests and wide presence with 200 clinical labs, 2,569 patient service centres and 6,426 pick-up points.

Strong financials: We expect Dr Lal to continue reporting industry-leading growth and witness 14.5% revenue CAGR with Ebitda and PAT registering 15.8% and 17.4% CAGRs respectively over FY19-FY22E. We expect the company to generate free cashflow of Rs 8.8bn in the next three years. RoE and RoCE would remain strong at 22.8% and 22.7% respectively in FY22E with RoIC moving over 100%.

Valuation and risks: We believe high growth visibility, strong FCF and over 100% RoIC by FY22E justifies premium valuations. We raise growth assumptions for our DCF model by 1-2% for FY23E-FY30E and roll over the valuation base to FY21.

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